Question

1. Demonstrate Earned Value Management for project portfolio analysis. Understand behavioral concepts and other human issues in evaluation and control.

Answer 1

Earned Value Management (EVM) is a tool to measure project performance against the project baseline. It helps monitoring project performance from both a cost and schedule perspective. Both these factors impact the overall project cost.

Earned value require the following parameters/ inputs:

• Planned Value (PV) = Budgeted amount of a given period
• Actual Cost (AC) = actual costs till date
• Earned Value (EV) = total project budget multiplied by the % of project completion

The above parameters are readily available to the Project Manager.

• Schedule Performance Index (SPI) : SPI = EV/PV

SPI measures progress achieved against progress planned. An SPI value <1.0 indicates less work was completed than planned effort. SPI >1.0 indicates more work was completed than planned effort.

• Cost Performance Index (CPI) : CPI = EV/AC

CPI measures the value of work completed against the actual cost. A CPI value <1.0 indicates costs were higher than budgeted for. CPI >1.0 indicates costs were less than budgeted for.

Note:

• For both SPI and CPI, >1 is good, and <1 is not good.
• Schedule variance = EV-PV, and cost variance = EV–AC.
• Subtracting can quickly be done in your head, and for these cases, >0 is good, and <0 is not good. But unlike SPI and CPI, variance cannot be effectively compared across projects or over time, where the budget for a project may have changed, because they’re relative to the size of the project.

• Estimated at Completion (EAC) : EAC = (Total Project Budget)/CPI

EAC is a forecast of how much the total project will cost.

Example
Project	ABC
Duration	1 year
1 year Budget (Overall Project cost)	$100,000
Half yearly Budget milestone (PV)	$55,000
Planned Value (PV) at 6 months	$55,000
Actual Cost (AC) at 6 months	$45,000
Parameters	Formula	Value (Output)	Inferences derived
Earned Value (EV)	($100,000 * 0.5)	$50,000
Schedule Variance (SV)	EV–PV = $50,000-$55,000	-$5,000	(bad because <0)
Schedule Performance Index (SPI)	EV/PV = $50,000/$55,000	0.91	(bad because <1)
Cost Variance (CV)	EV–AC = $50,000-$45,000	$5,000	(good because >0)
Cost Performance Index (CPI)	EV/AC = $50,000/$45,000	1.11	(good because >1)
Estimated at Completion (EAC)	(Total Project Budget)/CPI = $100,000/1.11	$90,000

Additional inferences from the analysis:

• Because SV is negative and SPI is <1, the project is considered behind schedule. We’re 50% of the way through the project but have planned for 55% of the costs to be used. There will have to be some catch-up in the second half of the project.
• Because CV is positive and CPI is >1, the project is considered to be under budget. We’re 50% of the way through the project, but our costs so far are only 45% of our budget. If the project continues at this pace, then the total cost of the project (EAC) will be only $90,000, as opposed to our original budget of $100,000.

Human factors in Evaluation and control:

• Project Management decision-making process involves evaluation of the alternative courses or solutions identified to solve the problem. Alternatives have to be evaluated in the light of the objectives to be achieved and the resources required and assigned. Evaluation involves a through scrutiny of the relative merits and demerits of each of the alternatives in relation to the objectives sought to be achieved by solving the problem and working towards achieving budget
• Continue to motivate employees in a new environment through a system of evaluation and rewards, as employee attitudes and expectations are fast changing;
• Planning and controlling – the two functions are closely interrelated in that while plans specify the objectives to be achieved, control as a managerial function facilitates to know whether the actual performance is in conformity with the planned one. So that, in the event of deviations, appropriate corrective measures could be taken. In the absence of adequate control mechanism, unexpected changes in the environment may push the organisation off the track. Thus, controlling implies measuring and correcting the activities to ensure that events conform to plans.
• Commitment of all people involved, all the internal and external stakeholders, resources and employees to achieve the planned deliverables and ensure optimized Earned value